Monday, April 14, 2008

Main Street Shrugged

In my never ending quest to be the Devil's Advocate, I find it important that both sides of the story be heard before comment and judgement is made. The big story to date is the American economy: are we approaching the recession that so many have predicted? Commodity prices are going way up, gasoline is over $3.25/gallon, and large financial companies are adding huge amounts to reserves to offset even larger losses, especially in the credit markets. Some are blaming the corporations for their greed; no surprise here, given the well-known insider sentiment that corporations exist solely to survive and (more importantly) advance the price per share for the holders of record, all else be damned, and when times go bad, the fingers point to the folks in the ivory towers and their "above-average" compensation. This doesn't help the newly unemployed -- their struggle is relentless. The easy solution is to break the principle down to its bare components: don't live beyond your means. Joe Sixpack struggles to survive and gets frustrated while watching his neighbor get another new car or the latest and largest audio/video appliance for the house. Mr. Sixpack wants to keep up, but cash is short and credit is scarce -- the only thing free is vocal resentment and jaded opinion. Meanwhile, the rich get richer, and the divide widens. We've seen this before, back in the late 70's. The middle class is less defined, unemployment increases as the market is slow to adjust to the changes in the global economy.
Housing is taking all the heat right now, because foreclosure rates are going through the roof. Suddenly everyone is surprised to see that people can't afford their mortgage. Pundits are screaming that we should have not let this happen, that we dropped the ball and proceeded with reckless abandon and loose underwriting guidelines, but that's all gone now. Wait a minute -- let's think about this: the housing market boom was created because Wall Street found another conduit to make big money in slick fashion by way of mortgage-backed securities. Nothing wrong with the idea, but like everything else, it has a limit, and that limit was raped and pillaged by the barbarians at the gate, and no one looked back until 10 months ago.
My suggestion is to not blame the cause, but blame the effect. Yes, housing guidelines got out of control, but not before gas prices and food prices. I seriously wonder if any of these economic/political pundits have EVER shopped in a grocery store or pumped their own gas for an extended length of time. I doubt it. If they did, they would have seen the problem a long time ago. When you only make so much per month and your disposable income continues to shrink every month because everyday commodity prices rise beyond expectations, you run out of options and you pull back. Now multiply that by 100 million or so and you can imagine the wave being created. Of course, if you make more than that average American (and you never have the need to balance your checkbook), this is irrelevant, and to that I say "congratulations, take your place in Myopiaville." In the real world, people are walking away from their homes, and it all trickles down from there. Wall Street doesn't get this -- they think the important thing is retail sales and housing sales and consumer sentiment, and they're wrong. Those items exist by way of the trickle-down from disposable income, not the other way around.
The popular sentiment today is that Greenspan and Congress created this housing mess and that's why the financials are getting killed. Actually, the financials are getting "spanked" for being out of line, i.e. too greedy. Look at it as the economy being the parent, and the financials being the spoiled kid: the kid pushes and pushes until it gets into trouble, and then the parent comes in with discipline and sends the kid to the corner until it learns its lesson. The financials loved these MBS deals cuz they were making a boatload of money, but then they got caught with their hand in the cookie jar one too many times. If you're really serious about solving this crisis, try this idea: do everything possible to lower gas prices by $1/gallon for an extended period of time. The market needs euphoria and hope, and it starts with the boots on the ground. If Joe Sixpack feels better about his dollar being able to afford more, he'll be much more likely to spend money on other consumerables. And don't skimp on the amount -- you have to show a big enough savings to change the sentiment, and $0.25/gallon won't do it.
Otherwise, don't be surprised when you read about the increasing number of foreclosures and bankruptcies. That's your sign that Main Street (and Joe Sixpack) is reacting the only way they know how -- by hoping that their sighs and shrugs will shake loose the over-abundance of greed and maybe, just maybe, Wall Street will feel the tremors enough to share in the experience and suffer their own losses. Just don't expect any sympathy from Main Street when it happens.